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As you all must know by now, either from
prior posts on this blog or any of a million other sources, the IRS is in deep
trouble for its handling of certain 501(c)(4) applications. I’m not going to comment directly on what the
IRS did or didn’t do in its administrative systems that resulted in the current
mess. But I do think it is time to
comment on the root of all the trouble, which is the existence of 501(c)(4)
itself.

Today in the NYT on-line "Room for
Debate" feature, which you can view here, I proposed my solution: just get
rid of 501(c)(4) (there are also very thoughtful contributions from Lloyd
Mayer - who also posts on this blog, Ellen Aprill, Doug Mancino and Rosemary
Fei). But I was limited to 300 words in that format; here I have the
freedom to flesh out my argument a bit more, so I’m going to take advantage.

The argument boils down to this: the
administrative havoc created by the (c)(4) designation in conjuntion with the
Citizens United case simply does not outweigh whatever marginal public benefit
the (c)(4) designation produces.
Accordingly, we should repeal it.

So let’s begin with some background. Have you ever asked what the difference is
between a "social welfare" organization under (c)(4) and a charity
under (c)(3)? My students in my Tax-exempt Organizations class do so
every year. And here is the convoluted, though ultimately simple, answer.

A 501(c)(4) organization is one that,
according to IRS regulations, “is operated exclusively for the promotion of
social welfare if it is primarily engaged in promoting in some way the common
good and general welfare of the people of the community. An organization
embraced within this section is one which is operated primarily for the purpose
of bringing about civic betterments and social improvements.” Now it should be fairly obvious that
“bringing about civic betterments and social improvements” is a charitable
purpose that would qualify an organization for tax-exemption under 501(c)(3),
rather than 501(c)(4). Indeed,
“improving society” is a core rationale for the existence of charity. So why do we have 501(c)(4) at all? Why aren’t these organizations simply exempt
under 501(c)(3)?

The answer lies principally in two acute
differences in the statutory language between 501(c)(3) and 501(c)(4). 501(c)(3) states that an organization qualifies
for exemption under that section only if “no substantial part of the activities
of which is carrying on propaganda, or otherwise attempting, to influence
legislation . . . and which does not participate in, or intervene in (including
the publishing or distributing of statements), any political campaign on behalf
of (or in opposition to) any candidate for public office.” In other words, 501(c)(3) organizations
cannot engage in a “substantial” amount of lobbying, and cannot engage AT ALL
in political campaign activity. In
contrast, 501(c)(4) contains no such limitations, and in fact the IRS’s view is
that lobbying to advance social welfare is itself a social welfare
purpose. As a result, a (c)(4) can engage in an unlimited amount of lobbying, contrary
to the (c)(3) limitation. On the other
hand, the regulations under (c)(4) confirm that political campaign activity is
NOT a social welfare purpose; but note that (c)(4) does not have the absolute prohibition against political campaign activity that a (c)(3) does. Accordingly, a (c)(4) also can engage in
political campaign activity, as long as its primary purpose remains promotion
of social welfare.

So when you boil all this down, a
501(c)(4) is essentially an organization with a charitable purpose that either
engages in too much lobbying or too much (i.e., ANY) political campaign
activity to qualify as a 501(c)(3) organization. And that in turn leads to the
ultimate question: why should we grant tax exemption to an organization that
would qualify as a charity but essentially violates the limitations on
political activity in 501(c)(3)?

[Side note here: Ms. Fei and Mr. Mancino
note that there are a few organizations that don’t engage in excessive lobbying
but are (c)(4)’s because they don’t meet some other requirement of (c)(3)
status, like the strict private benefit rule.
I’ll pen a longer response to that at some point, but my quick response
is pretty much the same: even if that is true – and I think the IRS hasn’t been
entirely clear on these points – it shouldn’t be. Why give a tax break to organizations that
don’t serve a broad enough charitable class or generate private benefits that
would disqualify them from charitable status?]

My answer is, we shouldn’t. Part of the problem with answering questions
like this is that we do not have any coherent theory for why we give
“charities” tax exemption – or indeed, what a “charity” is for exemption
purposes. But most people agree that
charities are organizations that provide a “public benefit” by offering
services otherwise unavailable from the private market and which
government either chooses not to provide or is affirmatively prohibited from
providing (e.g., religion). Different
folks explain this differently - the economists talk about market failure; the
political scientists and sociologists talk about “pluralism” and so forth. But the general concept is the same: we can
think of charities as organizations that are “gap fillers” – they fill the
holes left by the private market and government. Exemption is a partial government subsidy to
help these organizations provide their services – partial, because the government
can’t or won’t fully fund the activities of these organizations, but government
can “help” by freeing them from tax payments (it also helps by permitting a tax
deduction for charitable contributions to these organizations and permitting them to issue tax-exempt
bonds).

If you buy this explanation (and
admittedly not everyone does), then the (c)(4) essentially is filling a highly
specialized niche – it’s a charity that lobbies too much, or engages in
political campaign activity. So my
question is whether this is a kind of market failure (or pluralism or whatever)
that justifies the partial government subsidy of tax exemption. My answer is “no” – why should government
subsidize organizations to lobby the government? Do we really believe there is a serious
market failure in lobbying? That there
is too little lobbying in the world? So
much so that the government should give a partial subsidy for lobbying?

But, you may respond, don’t (c)(4)
organizations lobby on behalf of groups that otherwise have little voice in
government? Suppose that an
organization’s primary purpose is to lobby for more government programs for the
poor. Surely that is something that is
worth subsidizing, right? I
disagree. Note that a charity exempt
under 501(c)(3) and conducting some kind of active program for the poor can in
fact engage in SOME lobbying – just not a “substantial amount” of
lobbying. I think one can make a good
case that if you are concerned about “giving voice” to
otherwise-disenfranchised groups, that voice is best expressed by groups that
have active programs involving services to those disenfranchised, rather than
organizations that do nothing but purport to represent those groups in
legislation. And if your primary
activity is conducting a charitable program other than lobbying, you get
exemption under 501(c)(3) AND you can lobby (some). But even if you disagree with this argument, I come back to the following point: if we think too much lobbying (and ANY political campaign activity) is "bad" for a charity, what is the justification for creating a "charity lite" category that permits these things?

So my bottom line is this. The (c)(4) designation doesn’t get us much public
benefit that we couldn’t get with a (c)(3) that has an active program of service
and lobbies on the side. And yet as we
have seen over the past two years, the (c)(4) presents virtually insoluble
administrative problems of line-drawing regarding when political campaign
activity is “primary” and between “issue advocacy” and lobbying (completely
permitted) and “political campaign activity” (permitted as long as it is not
the “primary purpose”). Despite Ms. Fei and Mr. Mancino's pleas for better enforcement, I'm highly doubtful that the IRS will ever be able to adequately enforce these lines in the (c)(4) context. They can't even enforce them in the (c)(3) context very well, where the backdrop is an absolute prohibition on political campaign activity coupled with a softer limit on lobbying. So what would make anyone think there is some "magic formula" that will make these things enforceable in the (c)(4) context with even less-well-defined limits?

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Comments

So long as we continue to allow 501(c)(5) organizations (labor or agricultural organizations) and 501(c)(6) organizations (business leagues, chambers of commerce, etc) to lobby without limit, I think there should be a place for civic organizations to be tax-exempt and lobby without limit. Perhaps that need leads to establishment of a new tax-exempt category (as I suggest in the NYT on-line "Room for Debate") or maybe we turn 501(c)(4) into a category only for those organizations that do substantial lobbying. Another approach, which some have endorsed, would remove the limits on lobbying that currently apply to section 501(c)(3) organizations. Whatever we might do regarding lobbying, however, I hope that Congress amends section 527 to subject all campaign intervention to the disclosure requirements of that provision.

Posted by: Ellen Aprill | May 16, 2013 6:27:44 PM

I believe that JDC is correct in his analysis of the present situation. However, we need to be taking larger steps to narrow the amount of lobbying that goes on within the charitable arena. It would be interesting to see what the professors on this blog think as to how a "true" charitable organization should be defined. Lobbying is a business and should be treated and taxed as a business and not as a charitable undertaking. Ellen April makes a good point about (c)(5)'s and (6)'s, but she still falls back on the "have your cake and eat it too" argument. Do you really think that hospitals and colleges belong in the non-profit arena or should they be treated as businesses? These are the bigger questions that will be answered in the next few months or years as we start to see a paradigm shift in the charitable organization area.